Few people build wealth on a salary alone. Instead, investments compound earnings by putting money to work passively.
However, it’s important to remember that how much you keep is more important than how much you make. Risk and taxes are the two causes of investment losses, but there’s no safer investment than a tax-free investment.
Allowing your portfolio to grow tax-free removes the stress of moving your money around through 1031 exchanges or tax havens. Plus, you have a better chance of beating out inflation without the added burden of taxes.
Whether you’re self-employed or a salaried individual looking to build wealth for retirement, here are 11 tax-advantageous investments for building wealth.
What is Tax-Free Investing?
Tax-free investing is an investment approach where your profits aren’t subject to capital gains taxes. This is either because the gains are never taxed or because the tax is legally avoided through specific accounts or rules.
In simple terms, you keep more of what your investments earn.
However, tax-free investing doesn’t mean no taxes ever. The strategy uses tax loopholes, tax-advantaged accounts, and techniques that allow your investments to grow without triggering capital gains tax when you sell or withdraw.
With the right approach and guidance from a tax professional, you can grow your wealth while legally keeping more of it.
Best Tax-Free Investments for Wealth Builders
Capital gains taxes can take apporximately 15%–37% or more of your profits, slowing down your wealth creation. Over time, avoiding or minimizing those taxes can mean hundreds of thousands (or millions) more in compounded wealth.
Here’s my list of the best tax-free investments you can leverage to accelerate your progress:
1. 401(k)
Opening a retirement account is the best way to tap into tax-free assets. With a traditional employer-sponsored 401(k), employee contributions grow tax-free and reduce taxable income by transferring earnings from each paycheck.
As a result, you can contribute money to your 401(k) without taxing it while also reducing the amount of taxable income from your regular salary. The only kicker is that you’ll eventually pay taxes when you withdraw your funds at retirement.
An individual 401(k) provides the same tax benefits as an employer-sponsored plan for self-employed people and small-business owners.
While a 401(k) is primarily used for investing in mutual funds, it can also be used for index, large-cap, small-cap, foreign, bond futures, and real estate funds.
2. IRA: Traditional, Roth, and Self-Directed
IRAs are another popular retirement account for growing your wealth tax-free.
There are a few different types of IRAs, including:
- Traditional IRAs: Individuals contribute pre-tax money to their accounts and are taxed at the time of withdrawal.
- Roth IRAs: Individuals contribute already taxed earnings and can withdraw their funds tax-free at retirement.
- Self-Directed IRA (SDIRA): These retirement accounts allow people to invest in alternative assets, like crypto, gold, LLCs, or real estate, using a traditional or Roth structured account.
- SEP IRA: The Simplified Employee Pension IRA allows employers to contribute to their employees’ traditional IRA accounts.
- SIMPLE IRA: The Savings Incentive Match Plan for Employees allows employers to match contributions to an employee’s IRA.
All IRA accounts are fine options for retirement, with the major difference being whether or not you think you’ll be in a higher tax bracket at retirement. If so, a Roth IRA may be right for you.
Additionally, all IRAs limit your investment options to standard stock market assets, such as stocks, bonds, ETFs, and CDs, except for an SDIRA.
3. 1031 Exchange
A 1031 exchange is an investing strategy that allows you to “swap” one investment property for another as a way to avoid short-term capital gains. Under normal circumstances, you must own a home for one year before selling it to avoid a hefty tax bill on income from the sale.
The 1031 exchange allows you to avoid paying taxes at the rate of your ordinary income if you use the money earned from the sale to buy another property.
Section 1031 of the U.S. Internal Revenue Code allows you to avoid paying capital gains taxes after selling an investment as long as:
- You reinvest the proceeds from the sale within a certain window of time
- Reinvest in a similar property that’s of greater or equal value to the one you sold.
This strategy is a great way to raise capital for real estate.
Here’s what you should watch out for:
- Strict Timelines: Identify replacement property within 45 days; close within 180 days of sale.
- Qualified Intermediary (QI): Use a third party to hold proceeds. Direct ownership triggers immediate tax.
- No Boot Allowed: Any cash or non-like-kind property received counts as taxable income.
The key is preparation. Pre-qualify properties and work with experts. It’s also important to consult a tax advisor to structure for ongoing tax benefits without disrupting cash flow.
4. Tax-loss Harvesting
Tax-loss harvesting works by selling an underperforming, money-losing investment to reduce taxable capital gains. For example, dumping an underperforming property can offset your ordinary taxable income to reduce your tax burden for the year.
Here’s a simplified tax-loss harvesting example: Let’s say you sell Stock A at a $30,000 loss to offset a $50,000 gain from selling an investment property, reducing your taxable gain to $20,000.
Once the asset is off your roster, the money from the sale can be reinvested into a better investment option.
5. Long-Term Capital Gains
Another way to lower your tax bracket is to hold an asset for more than a year to reduce your capital gains tax. When you hold on to a property or any asset for longer than a year, you’ll pay long-term capital gains instead of short-term ones.
While the short-term capital gains rate ranges from 0% to 37%, long-term capital gains are taxed at 0% to 20%. Here’s what to consider:
- The 12-Month Rule: To qualify for long-term rates, you must hold your asset for one year and one day. If you sell at exactly 360 days, you are taxed at your ordinary income rate (up to 37% in 2025).
- The 0% Advantage: For many middle-income earners, the tax rate isn’t just lower, it’s zero. In 2025, if your taxable income is below $48,350 (single) or $96,700 (joint), your long-term capital gains tax is $0.
- Rate Comparison: While short-term gains are taxed at your marginal bracket (10% to 37%), long-term gains are capped at a maximum of 20% for the highest earners.
In short, one of the simplest ways to reduce your tax bill is often just a matter of patience.
6. Form an LLC
Forming an LLC allows you to avoid double taxation. An LLC is considered a pass-through entity by the IRS, meaning LLC owners aren’t on the hook for corporate-level taxes. For example, many people form real estate LLCs to reduce their tax burden on any sale of their investment properties.
LLC owners can instead report their profit shares and losses on their personal tax returns, greatly lowering their taxable burden. Here’s how it works:
Avoid Corporate Taxes
Unlike a standard corporation, which pays a flat tax on profits before you pay personal tax on dividends (“double taxation”), an LLC’s profits flow directly to your personal return. This ensures that your investment income is taxed only once.
The 20% QBI Bonus
Many real estate LLC owners can qualify for the Qualified Business Income (QBI) deduction. This allows you to exclude up to 20% of your rental profits from federal income tax—a massive benefit that isn’t always available to casual individual owners.
The Liability Shield
While the tax rates on a property sale are generally the same whether you own it personally or through an LLC, the LLC provides a “corporate veil.” This protects your personal assets (like your own home) from lawsuits or debts related to the investment property.
7. HSA
While often viewed as a way to pay for doctor visits, a Health Savings Account (HSA) is actually one of the most powerful investment vehicles available. Unlike a Flexible Spending Account (FSA), which is “use-it-or-lose-it,” the HSA is a permanent investment account that you own.
The Triple Tax Advantage
The HSA is unique because it offers three distinct layers of tax savings that help you avoid capital gains and income taxes simultaneously:
- Tax-Free Contributions: Every dollar you put in reduces your taxable income for the year.
- Tax-Free Growth: You can invest your HSA balance in stocks or ETFs, and you will never pay capital gains tax on the growth.
- Tax-Free Withdrawals: As long as the money is used for qualified medical expenses, you pay zero tax when you take it out.
Portability and Independence
You do not need an employer to open an HSA. As long as you are enrolled in a High-Deductible Health Plan (HDHP), you can open an account at almost any major brokerage.
- Self-Employed? You can contribute directly and claim the deduction on your personal return.
- Job Change? Your HSA stays with you. It is not tied to your company, and you can roll it over to a new provider whenever you like.
The Retirement “Pivot”
The “secret” to the HSA is using it as a backup retirement account. After age 65, the 20% penalty for non-medical withdrawals disappears. If you don’t need the money for healthcare, you can withdraw it for any reason and only pay ordinary income tax. This effectively turns it into a Traditional IRA with the added bonus of tax-free medical use.
8. Charity/Donations
Charitable donations are more than just a way to do good. They are one of the most efficient tools for eliminating capital gains tax entirely. However, the way you give matters more than the amount you give.
Donating Appreciated Stock (The Pro Move)
Instead of selling your stock, paying the capital gains tax, and then donating the cash, you should donate the stock directly to a 501(c)(3) nonprofit.
- Avoid Capital Gains: When you donate the shares, you never “realize” the gain. You pay $0 in capital gains tax, no matter how much the stock has gone up.
- Full Fair Market Value Deduction: If you have held the stock for more than a year, you can deduct the full market value of the shares on the day of the gift from your 2025 income (not just what you paid for them).
The “Standard Deduction” Hurdle
With the 2025 standard deduction sitting at $15,750 for individuals and $31,500 for couples, many people don’t give enough to “itemize.” To beat this, you can “bunch” several years of donations into a single tax year. This pushes your total deductions above the standard threshold, allowing you to maximize the tax-lowering power of your gift.
Qualified Charitable Distributions (QCDs)
If you are age 70 1⁄2 or older, you have access to the ultimate charitable “cheat code.” You can transfer up to $111,000 directly from your IRA to a charity. This money is never counted toward your Adjusted Gross Income (AGI). By keeping this money off your return, you stay in a lower tax bracket and may reduce the taxes you pay on Social Security or Medicare premiums.
9. US Series I Savings Bond
A Series I bond is issued by the U.S. federal government with dual interest-earning potential that offers inflation protection. Every Series I bond earns both a fixed interest rate and a variable rate that changes with inflation.
Series I bonds are never taxed at the state or local level. While federal taxes are based on the interest earned while an I bond is held, you can choose the method you want to use to pay your I bond taxes. Here’s an in-depth look at how this works:
State and Local Tax Immunity
One of the biggest perks of I Bonds is that the interest is 100% exempt from state and local income taxes. If you live in a high-tax state like California or New York, this automatically gives you a higher “after-tax” yield compared to a high-yield savings account or a CD.
Choose Your Federal Tax Strategy
While you do owe federal income tax on the interest, the IRS gives you two ways to pay it:
- The Deferral Method (Most Common): You pay nothing until you cash in the bond or it reaches its 30-year maturity. This allows your interest to compound “gross,” effectively acting like a tax-deferred retirement account.
- The Annual Method: You can choose to pay tax each year on the interest earned. This is a smart move for children or low-income investors who might currently be in the 0% or 10% tax bracket, as it prevents a massive “tax bomb” when the bond is eventually cashed out.
The “Education Cheat Code”
- The Catch: To qualify for the 2025 exclusion, your Modified Adjusted Gross Income (MAGI) must be below $114,500 (single) or $179,250 (married filing jointly).
- Age Requirement: You must have been at least 24 years old before the bonds were issued to claim this exclusion for your (or your dependent’s) college costs.
10. 529 Education Fund
A 529 fund is a college savings plan sponsored by individual states. Money in an account can be used for school tuition, books, and other qualified expenses at most institutions. Contributions to a 529 account are counted as after-tax deductions.
However, contributions can grow free of federal or state income taxes. Therefore, no income tax is paid when 529 funds are withdrawn for qualified expenses.
A 529 plan is a state-sponsored investment account that offers a powerful “Double Tax Advantage.” While it was originally designed for college tuition, recent laws passed in 2025 have transformed it into a multi-purpose tool for education and retirement.
Tax-Free Growth and Withdrawals
- The Federal Benefit: Like a Roth IRA, you contribute “after-tax” money. However, all investment growth is 100% tax-free at the federal level as long as the funds are used for qualified education expenses.
- The State Benefit: Most states offer an additional “carrot”— you can often deduct your contributions from your state income tax (up to specific limits), providing an immediate tax return on your investment.
The 2025 Expansion: K-12 and Vocational Support
As of July 2025, the definition of “qualified expenses” has broadened significantly:
- K-12 Flexibility: You can now use up to $10,000 per year (increasing to $20,000 in 2026) for private school tuition, books, tutoring, and even standardized test fees (like the SAT or ACT).
- Trade Schools & Licensing: 529 funds can now pay for professional credentialing and licensing exams. They cover everything from the Bar Exam and CPA prep to welding and HVAC certifications.
- Special Education: Funds can now be used for educational therapies for students with diagnosed learning differences, such as ADHD or dyslexia.
The Retirement “Safety Valve”
A common fear is “overfunding” a 529 if a child doesn’t go to college. However, this risk is largely gone now thanks to:
- Roth IRA Rollover: You can roll over up to $35,000 of unused 529 funds into a Roth IRA for the beneficiary, tax-free and penalty-free (provided the account has been open for 15 years).
- Student Loan Paydown: You can use a lifetime limit of $10,000 from a 529 to pay off the beneficiary’s (or their sibling’s) student loans.
11. Municipal Bond
Finally, a municipal bond is issued by a state or local government to fund community investment projects. When purchasing a municipal bond, you’re effectively lending money to the bond issuer in exchange for interest payments.
While short-term municipal bonds may mature in one to three years, long-term municipal bonds may mature 10 to 20 years from now. Interest on municipal bonds is generally exempt from federal taxes. The bonds are also exempt from state and local taxes if you reside in the state where your bond is issued.
Federal Tax Immunity
The primary draw of municipal bonds is that the interest earned is generally 100% exempt from federal income tax. For an investor in the top 37% tax bracket, this is a massive advantage. While a corporate bond might offer a higher “sticker” interest rate, you could actually end up with more money in your pocket from a lower-yielding Muni because the government doesn’t take a cut.
The “Home-Field” Advantage
If you purchase bonds issued by your own state or local government, the interest is typically exempt from state and local taxes as well. This creates a “double-tax-free” (or even “triple-tax-free”) yield in cities like New York.
The “Taxable Equivalent Yield” (TEY)
To see if a Muni is a better deal than a standard bond, you must calculate its TEY. In 2025’s high-interest-rate environment, a 4.5% municipal bond for someone in the highest tax bracket is roughly equal to a 7.5% return on a taxable corporate bond.
We often focus on reducing risk when investing. However, a core principle of investing “for keeps” is to make choices that minimize taxes. The fun begins when you realize this can be done with investments ranging from real estate to health savings accounts.
FAQs on Tax-Free Investment Strategies
What makes a 401(k) a tax-free investment?
A traditional 401(k) lets contributions grow tax-deferred, reducing your taxable income upfront. Withdrawals are taxed as ordinary income in retirement, but an individual 401(k) offers the same benefits for self-employed people investing in stocks, bonds, or real estate funds.
How do Roth IRAs provide tax-free growth?
Roth IRAs use after-tax contributions for tax-free qualified withdrawals, including gains. Self-directed Roth IRAs can expand to include alternative assets like real estate or crypto, which is ideal if you expect to be in higher tax brackets later.
Can a 1031 exchange make real estate tax-free?
Yes, a 1031 exchange defers capital gains tax by swapping like-kind investment properties of equal or greater value. Use a qualified intermediary, meet 45/180-day timelines, and avoid a cash boot to keep proceeds tax-sheltered.
What is tax-loss harvesting?
Tax-loss harvesting sells losing investments to offset gains, reducing taxable income. Up to $3,000 of net losses is deducted from ordinary income annually, with excess carried forward—reinvest proceeds into better assets after the 30-day wash-sale rule.
How does an HSA offer triple tax advantages?
HSAs provide tax-deductible contributions, tax-free growth on investments like stocks, and tax-free withdrawals for medical expenses. After 65, non-medical withdrawals are taxed as income only, with no penalty. This makes it a stealth retirement tool.
Are municipal bonds truly tax-free?
Municipal bond interest is exempt from federal taxes, plus state/local taxes if in-state issued. High earners get a “tax-equivalent yield” boost—a 4.5% muni might equal 7.5% taxable for 37% bracket investors on a taxable bond.